What is Swing Trading? A Beginner's Guide

It's not necessarily difficult to begin investing in the financial markets. If you have capital which you would like to deploy into investing, it's a fairly simple task to open up an account with an online trading platform. 

However, given how markets have become efficient and information disseminates faster than ever before, becoming a successful investor needs a blend of skill and strategy. It helps to understand the markets, as well as the trading strategies you want to use. Swing trading is one of these approaches. 

If you're looking for more information on swing trading, our beginner's guide has all the answers you seek, collected in one place. Let's get started!

How Does Swing Trading Work?

A type of fundamental trading, swing trading¹ is defined as investment activity that lies somewhere between the incredibly breakneck pace of day trading and the slow, patient pace of long term investing. Investment hold periods are short to medium in length, anywhere from a few days to even a few weeks depending on the circumstances. 

This "middle ground" approach can result in higher profits per successful trade than those associated with day trading - and all of this at a faster pace than you would get with long term investing.

Swing trading is highly dependent on selecting assets that have both the right level of liquidity and volatility. Too little of both and there are fewer opportunities to profit on a trade, even after a few weeks; too much, meanwhile, could lead to heightened risk of losing your investment if the valuation of that asset falls below its purchase price. 

Swing trading is highly dependent on market conditions as well, which means that it takes a smart, educated investor with their fingers on the pulse of the relevant markets to know which way they will shift.

Advantages and Disadvantages of Swing Trading

As a fundamental trading strategy, swing trading has much going for it. It also has its drawbacks, of course, as every strategy does. Let's take a closer look at these advantages and disadvantages in turn.

Swing trading is more passive than some types of investment activity, especially when compared to day trading. Day trading requires a large time commitment, as decisions must be made quickly to be successful. With swing trading, this timeframe is more drawn out, which means there's no requirement to monitor each trade so closely. Other advantages of swing trading include its ability to optimize short-term profit potential by capturing a large amount of market swings, something that day traders often miss out on, and how swing trading can rely on technical analysis heavily, which simplifies the trading process.

Swing trading, like all investing, carries risk. In this case, the largest risk factors are how swing trade positions can suffer from overnight and weekend market changes, which is something that day trading isn't exposed to. 

As mentioned above, an abrupt market reversal can result in serious losses under certain circumstances, and while swing traders have a better chance to ride market trends longer than day traders, it's still all too easy to miss out on much longer-term trends that only buy-and-hold trend traders gain access to.

Swing trading has unique risks associated with it, the first being its exposure to overnight and weekend risk. This happens when the value of an asset gaps up or down substantially when the market opens back up again. Abrupt and unforeseen market reversals also represent a major risk factor for swing traders, which is why it's crucial to select markets or assets where investors are comfortable with the level of volatility. With market reversals often tied to external factors, though, this can be very hard to predict.

What is a Swing Trading Strategy?

Swing trading strategies rely on identifying multi-day chart patterns. Some of the most common patterns that swing traders use include moving average crossovers to identify possible trends that indicate when open and close positions are quickly approaching for a specific asset. Swing traders devise plans and strategies that often revolve around looking for predictable movements in the price of an asset. Understanding these trend signals can allow an investor to make relatively quick trades based on an approaching trigger point.

Being able to do so reliably is challenging, as no strategy is completely foolproof. At the same time, it's not necessary to profit from every transaction if the majority of your trades leave you profitable. This is why many swing traders concentrate on transactions with a favorable risk/reward ratio; if your strategy is good enough, then you only need a few successful trades to remain profitable overall.

Day Trading vs. Swing Trading

Day trading and swing trading have many similarities in that holding positions are short-term. However, the biggest difference between the two is that day trading hold positions are short-term in the extreme, often just a few hours or even a few minutes. Swing trading, by comparison, often involves a minimum of holding a position overnight, though swing trades can and often do stretch for several days to even a few weeks. 

There's still much you should be aware of when it comes to understanding swing trading and the role that technical indicators play in becoming a successful swing trader. here are some frequently asked questions about both swing trading and swing trading indicators.

How Much Capital Do I Need for Swing Trading?

Swing trading, unlike day trading, does not typically require a minimum balance to be kept in a trading or margin account. You will need some capital to begin, and since your investments will remain illiquid for several days or even weeks, you will need enough resources to operate more than one open position at a time. Many swing traders dedicate around $10,000 to $20,000 in capital to begin trading.

How Should I Size Positions for Swing Trading?

One helpful rule to follow in swing trading is to endeavor to keep your losses as small as possible. Assign a percentage of your maximum risk for a trade, such as 4 percent for example, and you can limit the risk to your portfolio by 0.5 percent or less by taking a 12.5 percent position (0.5 percent divided by 4 percent, in the above example). 

How can I gain access to technical analysis tools?

Tools for technical analysis, including access to different swing trading indicators, can easily be found online. There are many different websites and online trading platforms that offer technical analysis tools for traders to use. Some of these are free, while others may require a subscription. It's up to you to find the right site that offers the best mix of tools for your needs.

Which swing trading indicators are most popular?

It can be difficult to choose which exact combination of swing trading indicators you should rely on when making trading decisions. Too few and you're not getting a complete picture; too many and you're likely to be inundated with excess information. It's therefore useful to combine the use of both lagging indicators like moving averages with leading indicators like stochastic oscillators and an RSI to get a more complete understanding of movements in asset prices.

Composer for Swing Traders

Because swing trading requires access to technical analysis tools, it's practically a requirement for swing traders to work with an online trading platform like Composer that offers these tools to their members. Without proper data visualization opportunities, it's nearly impossible to see the telltale signs of emerging trends in time to act on them reliably.  Composer also has a vibrant online community of traders that can discuss upcoming trends and share knowledge and insight, a must for new traders.

Other ways an online trading platform like Composer can help is by offering access to historical data, which is invaluable for backtesting trading strategies, especially automated ones that are designed to open and close trade positions once asset values hit certain thresholds. Many day traders and swing traders use such systems to minimize risk and maintain discipline. Thankfully, Composer has easy, no-code required capabilities for any trader looking to design their own automated strategies. 

Swing trading is a unique investment method that provides many avenues for growth, but it also has its own challenges. If you want to learn more about swing trading and even try it out for yourself, you can trust Composer as your online trading platform of choice.